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09-4311-Inflation-1

09-4311-Inflation-1 - Inflation Chapter 6 Cardoso et al...

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Inflation Chapter 6 Cardoso et al. ( Chapter 5 Franko) Also: Edwards, S. (1995). “Crisis and reform in Latin America”. World Bank.
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Why was Latin America so inflation prone? What caused inflationary pressures in the region? What mechanisms were used to bring π under control?
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Two schools of thought Monetarists (MiltonFriedman): Inflation is always and everywhere a “monetary phenomenon”. Structuralists: The ECLAC had its own explanation of inflation. While pursuing ISI, several countries in Latin America (e.g. Brazil, Argentina and Chile) had been experiencing high rates of inflation.
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Structuralists Different sectors of the economy developed at different speeds creating bottlenecks. Shortages in sectors that fail to grow as rapidly as the rest of the economy generate price increases. Low productivity in the agricultural sector leads to stagnant food production As the industrial sector and urban population grow, the demand for food increases faster than its supply. Prices increase, then workers ask for higher nominal wages; hence, firms rise prices to satisfy demand for higher wages . Firms pass on these wage increases to the final price of the good, and the inflation process is set in motion.
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Structuralists Why? Economy cannot import enough food. As a result of the inadequate prices of exports. Currency depreciation? Labor markets are imperfect. Heterogeneous, labor unions. Despite high unemployment rates for unskilled workers, skilled workers organize to demand higher wages. Oligopolistic goods markets Allow firms to sell at a markup and pass on price increases.
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Structuralists π is ratified by monetary policy, which accomodates these forces in order to maintain employment. Since π is the result of structural causes, more money is needed to cover nominally larger transactions. If monetary authorities restrained credit, slower growth would follow. π might be a necessary consequence of growth. but sometimes they used price controls, for example, in agricultural products)
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Structuralists Moreover, Budget deficits incurred by investments in sectors suffering bottlenecks will be growth enhancing.
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